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China Rate Cut Provides Icing For Stock Connect Scheme
By: Dr Chan Yan Chong
Articles (200) Profile

On the night the Shanghai-Hong Kong Stock Connect Scheme was officially launched on 17 November, I was invited to attend an investment seminar. At the seminar, I posed a question to the audience: “Who has bought Shanghai A-shares today through the Shanghai-Hong Kong Stock Connect Scheme?” The answer was none.

The lukewarm response to the stock connect scheme may be a blessing in disguise. Over the past seven months, when the market was busy driving up stocks related to the scheme, I advised against investing in H-shares that have a big discrepancy in prices from their A-shares counterparts. Instead, I advised investors to buy in selected big cap Hong Kong blue chips and Chinese A-shares exchange traded funds (ETF).

Big cap blue chips have the advantage of being flexible enough to defend on downturns and ride upon on upturns, whereas Chinese A-shares should have bottomed out by now. I also advised against viewing A-shares as objects for hit-and-run speculations, and instead look for worthy A-shares with long-term investment potentials.

The connect scheme does bring many new opportunities for everyone to invest directly in the Shanghai A-shares market. Over the past five years, the Chinese A-shares have been consistently trending lower. However, I believe the A-shares market has bottomed out, and the 2,000-point level of the Shanghai Composite Index (SHCOMP) should now form a strong defence line. In the past, I always advised everyone to buy A-shares ETFs whenever the SHCOMP dipped below 2,000 points. Now, everyone can buy A-shares directly, in addition to traditional A-share funds and A-share ETFs that have had their premiums heavily shaved off.

No matter how you look at it, the Shanghai-Hong Kong Stock Connect Scheme is a good development. Prior to its official launch, many have debated over whether the scheme is good for Shanghai or Hong Kong shares. What investors should be concerned about is whether the scheme can provide them with investment opportunities.

The stock connect scheme has also stoked interests in junk shares in Hong Kong, especially shell shares, because the scheme has attracted mainland Chinese market makers and speculators to invest in shell shares in Hong Kong. When share prices of these shell shares far exceed their market value, we have to watch out for speculative buying at play.

One of the reasons why China is pushing for the stock connect scheme is to attract international funds into the Chinese A-shares market, with the hope that these funds could wean local investors from their bad habit of investing solely in third- or even fourth-tiered stocks. There will inadvertently be those who worry that the scheme will have an influence on the Hong Kong stock market, transforming it into one in which everyone only trades in third- and fourth-tier junk stocks. For me, I do not see that as a problem.

Although many people believe that all retail investors from China are speculators with only short-term interests and that there are no long-term investors in China, I still believe that there are many A-shares on the Shanghai bourse with long-term investment potentials. I also believe that there are many retail and institutional investors that are interested in good quality Hong Kong blue chips. Today, many Hong Kong blue chips are priced reasonably, have low price-to-earning and price-to-book-value ratios, and offer decent dividend yields.

On 10 April, Chinese Premier Li Keqiang announced that the Shanghai-Hong Kong Stock Connect Scheme was ready to go live. The next day, and for the entire month following, the Hang Seng Index (HSI) went into a series of dives. The current behaviour of the HSI since the connect scheme has gone live is reminiscent of its performance in April to May.

So, is this trend an anti-climax, or is it a demonstration of the stock market wisdom “sell on good news”? Actually, that is not a big deal, for the mid- to long-term outlook of the HSI is still bullish. More intriguingly, was the Chinese government trying to pave the way for the stock connect scheme when it announced a surprise rate cut on 21 November?

A rate cut will benefit many industries, with the real estate industry standing to benefit more. Incidentally, I have recently been looking favourably at Chinese real estate shares and have recommended the sector to investors on many occasions, for I believe property shares have bottomed out and are on the rise. While the market is indeed filled with opportunities, the problem is: can you catch these fleeting opportunities? The launch of the Shanghai-Hong Kong Stock Connect Scheme is definitely an opportunity.

We saw the Chinese government’s policies undergoing many changes in 2014: various Chinese cities have introduced property cooling measures in succession, the Shanghai-Hong Kong Stock Connect Scheme is launched, and large-scaled infrastructure projects are under way. These are signs of the Chinese government’s determination to inject more vitality into its economy. The recent rate cut is the icing on the cake, and I believe more cuts are on the way.

The Chinese government could even relax the bank loan-to-deposit ratio so as to increase the lending power of banks. The fact that the People’s Bank of China chose to cut rates one week after the launch of the stock connect scheme does indeed seem like it is trying to smoothen the way forward for the scheme. The biggest beneficiaries of the rate cut are the A-shares and H-shares.

I have mentioned many times in the past that the monetary policy of China is intentionally opposite to that of the US. When the US relaxes its policy, China will tighten; when the US tightens, China will relax. This is fine, for it helps to achieve a balance in the global financial order. If China were to follow suit when the US tightens or relaxes, the global economy will surely be more unsteady and risky than today. Over the past few years, the Chinese stock market has been faring poorly, primarily because of the tight monetary policy adopted by the Chinese government to prevent hot money, which is a product of the US’ quantitative easing (QE) policies, from flowing into China. For this reason, news that the US is exiting QE has brought cheers to the Chinese stock market.

The Chinese economy is bottoming out and undergoing transformation, which throws up many investment opportunities, especially now that mega infrastructure projects will be commencing soon. With Xi Jinping and Obama signing a long-term treaty to cut carbon emissions, this would present more investment opportunities in environmental protection.

Municipal governments will open up further the medical services industry, which traditionally was monopolised by the government. This will also provide endless opportunities for investors. The liberalisation of bank lending rates has both increased the chances of survival of private companies as well as the banks’ bottom line, so it is a measure that kills two birds with one stone. Even though Chinese factories are facing the pressure of rising costs, the service industry is going through a booming growth, and there is a huge market out there.

Dr Chan Yan Chong is a renowned investment expert with many accolades under his belt.

Please click here for more information about this author.

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